NEW YORK, Feb 2 (Reuters) - U.S. retail brokers, looking to
combat claims that they fail to get the best possible prices on
trades for their mom-and-pop customers, plan to give clients
more information about how their trades are executed.

Regulators at the U.S. Securities and Exchange Commission
are looking at whether discount brokers have conflicts that
result in individual investors missing the best possible deal
when buying or selling shares.

The potential conflicts stem from payments that brokers
receive from the market makers that are ultimately buying shares
from or selling to individual investors. Critics say those
payments may encourage retail brokers to send orders to
whichever market maker is willing to pay the broker the highest
price, even if the investor could have gotten a better deal
elsewhere.

Most brokerages do not disclose the size of the payments
they receive, but TD Ameritrade said it took in $304
million from the practice in 2014, up 29 percent from the year
before.

The payments are legal and retail brokerages say they
benefit customers because they help keep commissions low.
Full-priced brokerages like Morgan Stanley generally charge
higher commissions and do not accept these payments.

Now a group including TD Ameritrade, Charles Schwab Corp
and Fidelity Investments hopes to ease concerns about
conflicts by giving investors more detailed reports including
how much money on average they saved the customer by executing
their trade a particular way, and the average speed at which the
orders were executed.

The brokerages, which make hundreds of thousands of trades a
day for retail investors, confirmed these plans to Reuters,
which have not previously been disclosed. The voluntary effort
will help the SEC in its review on order routing, TD Ameritrade
Chief Executive Fred Tomczyk said in an interview.

The fact that brokers are making this effort voluntarily
shows how concerned they are about the appearance of a conflict
of interest, and the SEC probe they face. The SEC has said it is
looking at requiring brokers to disclose more about how they are
routing trades, and brokers hope their efforts will eliminate
the need for new regulation.

The Financial Information Forum, a securities industry trade
group, is leading the effort to standardize and simplify the
reports that some brokers already provide. The information is
expected to be included in customers' brokerage statements.

The payments that brokers receive have risen dramatically
over the past decade, while commissions have remained largely
unchanged, said Dave Lauer, president of market structure
consulting firm KOR Group LLC, which advocates for reform of
order execution disclosure rules.

Payment for order flow is a clear conflict of interest, he
said. "And if you are not going to get rid of that conflict of
interest, then you have to disclose it appropriately and
sufficiently, and they haven't done that," he said of the retail
brokerages.

If investors had more and better information about what
happens when they trade, they could make better decisions about
which brokers to use, Lauer said.

Order routing can influence the prices that institutional
investors receive too, an idea explored in Michael Lewis' 2014
book "Flash Boys: A Wall Street Revolt."

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Wholesale market makers are willing to pay to trade with
retail stock investors because executing those trades can bring
a tidy profit. The market makers pay for the right to trade with
investors, and then try to match buyers and sellers without
going to exchanges, pocketing the difference between the price
at which they can buy and sell.

If the stock price moves in the wrong direction, before the
market maker can match the shares, the profits evaporate. Retail
investors do not tend to make market-moving trades, unlike
institutional investors, so the market maker has a better chance
of profiting.

It is difficult to determine how much harm, if any, the
payments from market makers cause investors. By law, brokers
must give a customer a price at least as good as the best price
quoted by major stock exchanges.

But if a customer is looking to buy shares, and a broker has
to choose between two market makers, the broker may choose the
market maker that it receives the highest payments from, instead
of the lowest possible price for the investor-in particular, the
market maker offering the biggest discount on the best price
quoted by an exchange.

Researchers from the University of Notre Dame and Indiana
University have suggested that a small segment of retail orders
- those with instructions to be executed at a particular price -
may indeed be harmed by "payment for order flow" practices.
Those investors, they say, may miss out on profitable trading
because their orders are not necessarily routed to the best
possible venue.

But the vast majority of retail investors - those who want
their trades executed immediately - actually benefit from the
financial relationships between their brokers and market makers,
said Robert Battalio, a professor at Notre Dame who co-authored
the study.

That's because the market makers buy the orders from the
brokers at a price at least as good as can be found on any
public exchange, immediately locking in the price the investor
sees.

If the order were sent directly to an exchange, the order
would be put in a queue based on when it arrived, and the price
could move in an unfavorable direction before the order is
executed.
(Reporting by John McCrank and Jed Horowitz. Editing by Dan
Wilchins and John Pickering)